The past two years have brought extraordinary change in the Soviet
Union. In a place where capitalism was once fought with religious
fervor, it is today advocated with enthusiasm.

This advocacy of free market thinking directly threatens those who
seek to maintain the socialist system. One of the foundations of that
system is state control of real estate and financial services. Recent
developments clearly indicate the willingness of top Soviet leaders to
privatize these markets. Such a development promises big changes (and
disputes) for the housing sector.

Housing is a major issue in the U.S.S.R. Letters to Soviet
newspapers frequently cite inadequate living conditions as the
country's number one problem. Few Soviet leaders disagree that the
solution lies in the construction of more high-quality units closer to
places of employment. The problem stems from the fact that historically,
housing has been considered a right in the Soviet Union, rather than a
commodity, as it is in the United States.

State control and guaranty of housing has created a paradox. While
a majority of Soviet citizens have for decades lived in crowded and
inadequate apartments, they have done so at the state's expense.
The state rental rate was set in 1928 at 3 to 4 percent of income, and
is today estimated to average just 7 to 10 percent. It is difficult to
imagine housing any cheaper. So as the Soviets seek to privatize
housing, fundamental questions go right to the heart of the
nation's economic and political future: first, who will own better
housing - the state or the consumer? Second, who will pay for it? And
finally, how will they pay for it?

As part of "perestroika," Soviet President Mikhail
Gorbachev has touted private housing development and individual
homeownership as the most efficient vehicles for improving Soviet
housing conditions. Homeownership, the Soviet leader has said, will
motivate Soviets to work harder and become better consumers by giving
them more of a stake in perestroika. To finance this new process,
Gorbachev hopes to create a U.S.-style construction and mortgage finance
system. As it turns out, he is relying in large part on U.S. agencies,
firms and consultants to show the way.

"It is clear that it is impossible to solve the housing
problem using the old methods," Gorbachev noted in a major decree
earlier this year. "We will, as a matter of principle, need a new
approach to all the complex questions of housing policy."

Because of ideological differences and concerns about inflation,
freeing up homeownership rights has met with predictable opposition.
Just this past September, for example, Gorbachev and advocates of
moderate reform, led by Prime Minister Nikolai Ryzhkov, dueled over the
desired pace for allowing individual economic rights. This duel is
continuing, and it may be many more years before ideal land-use,
personal mobility and ownership rights that we in the United States take
for granted are popularly accepted and implemented in the U.S.S.R. In
addition, Soviet housing officials are undecided on whether to focus
reform on new or existing housing. They are also unsure as to whether an
overall housing authority should be centered on the national, regional
(republic) or local level.

"If you were looking to borrow mortgage money for 20 years
today in the Soviet Union, would you do it?" asked Jonathan Russin,
founding partner of the Washington, D.C. firm, Kaplan, Russin and
Vecchi. "I would think not. Everything is up in the air until we
get some clarifications."

Without some guarantee that a person would be able to legally use
and profit from the sale of real estate, as we do in the U.S., Soviet
investors and citizens remain reluctant to pump money into single-family
and cooperative housing. If these guarantees are implemented too
quickly, however, real estate speculators could snatch up most of the
available land and housing, and immediately raise rents beyond the
capability of average Soviet citizens. Undaunted, Gorbachev continues to
promote a national reform agenda - amidst criticism from all sides that
he is either moving too fast or too slow.

"The housing dilemma is symptomatic of all the Soviet
Union's present day dilemmas," wrote architect and columist
Roger K. Lewis in a recent Washington Post article. "The system
doesn't work, and many want to change it for the better. But
changing it seems as risky, as costly, as unpredictable and
destabilizing as not changing it at all."

Maintaining a sufficient balance of protection and reform for the
housing sector has led Gorbachev and other Soviet leaders to consult
with experts in the United States and other Western nations for advice.
Soviet leaders have long sought U.S. housing expertise, but cooperation
between them until recently has yielded little progress. In 1974,
American and Soviet representatives signed the U.S.A./U.S.S.R. Agreement
on Cooperation in Housing and Other Construction. This agreement was
renewed in 1984. But it was not until late 1985 that then HUD Secretary
Samuel R. Pierce led a delegation to the Soviet Union for the first of
several visits designed to encourage the Soviets to buy U.S.
construction products.

The HUD exchange effort helped lead to a 1987 Moscow trade show
named "Stroyindustriya `87," (Construction Industry `87) where
116 U.S. firms were among 400 exhibitors representing 23 nations.
Anticipating bigger things yet to come, Washington columnist Jack
Anderson characterized HUD at the time as the "Unlikely Engine of
Detente."

Although many participating U.S. firms failed to profit financially
from Stroyindustria `87, important networks were established that are
continuing to yield advice to the Soviets on how best to proceed with
perestroika's housing reforms. In the provinces, local governments
have taken the lead on housing reform. In early July, for example, the
Moscow city council agreed to privatize its entire housing stock (more
than 3 million apartment units). The continuing fragmentation of
economic authority in the nation is giving rise to new questions about
which entities are best equipped to manage housing and mortgage issues.

On the national level, Gorbachev launched a public campaign for
better housing policy this past May, issuing a decree "concerning
new approaches to the resolution of the housing problem."

"People are beginning to doubt the possibility of every family
having its own apartment or house by the year 2000," Gorbachev
warned Soviet ministers. In order to reach this goal, he said, the
nation would have to build 30 million apartments and houses at a minimum
of 2 billion total square meters (6.56 billion square feet) of living
space.

Gorbachev's ambitious decree called for renewed efforts to
privatize homeownership and build new single-family houses. His plan was
met with skepticism, however, from Soviet and American economists who
found the proposals sound, but thought they would encounter the same
bureaucratic resistance as other elements of Gorbachev's economic
reforms.

"The idea is good, and it will probably help Gorbachev's
popularity," Soviet economist Gennadi N. Zoteyev told the New York Times, "but I have serious doubts about whether it can be carried
out in practice."

Not easily deterred, Gorbachev and Ryzhkov gave the chairman of
"Gosstroy" (the Soviet national Construction Committee),
Valeryi Serov the job of putting the pieces of the housing puzzle
together. Serov, after signing a protocol agreement with the Jones
Group, Inc., a major U.S. commercial builder based in Charlotte, North
Carolina, created several working groups, one of which (the Housing
Finance Working Group) was charged with developing plans for creating an
"economically viable, single-family housing market in the
U.S.S.R.," including plans for understanding U.S. systems of
mortgage and construction finance.

With the help of an American consultant, Construction Marketing and
Trading, Inc. (or CMT), Serov and other Soviet officials in the Housing
Finance Working Group nurtured contacts with major U.S. builders,
mortgage lenders and housing and finance specialists. CMT, led by Dr.
June Q. Koch, provided the impetus for these meetings. Koch, a former
assistant secretary for policy development and research at HUD during
the Reagan administration, was a major player in Stroyindustria `87, as
well as other U.S./U.S.S.R. construction exchange efforts.

In the course of this process, Soviet officials reached informal
agreements with U.S. firms to target the Moscow and Novgorod regions for
500,000 units of single-family pre-fabricated homes by 1995. These
units, as originally planned, would be individually owned and financed,
and would be built on land leased from the appropriate government
authority. The leases will be long term, and patterned after those
currently held by some Soviet farmers. Soviet housing officials hope to
expand this effort, and have several initiatives and joint ventures
underway in various stages of planning and development.

"They are working on developing a mortgage system from the
ground up," Russin, partner with the Washington-based advisory
firm, explained. Russin, currently active in assisting the Soviets in
their housing efforts, noted that the Soviet mortgage situation is very
similar to conditions in Latin American countries 25 years ago.

"The experience is relevant because the idea of lending beyond
two-to-three years in an open economy is something the Soviets have not
encountered," he explained, "just as it had not been
encountered in Latin America."

In August, three leaders of the Soviet's Housing Finance
Working Group completed a fact-finding trip in the United States. During
this visit, the working group met with representatives of KPMG Peat
Marwick (management consultants), Kaplan, Russin & Vecchi, the Jones
Group, Fannie Mae, Citicorp Mortgage, Inc., St. Louis and the Mortgage
Bankers Association of America.

In a three-hour meeting with senior MBA staff at the trade
association's headquarters, the conversation ranged from the most
basic details of how prospective homebuyers choose a home and obtain
financing, to explanations of servicing-release premiums and government
credit enhancements. Working Group Chairman Yevgeny V. Desyatchikov,
deputy chief of Zhilsotsbank - the Soviet's first public commercial
bank which, translated into English is short for "the Bank for
Housing, Municipal Services and Social Development" - strongly
emphasized his country's need for information about U.S. housing
finance.

"It took you 20 years to get to where you are," he
explained in reference to the U.S. secondary mortgage market, "but
we have to get there as soon as possible."

Desyatchikov was joined in the meeting by two other members of the
working group, Oleg A. Khorov, executive director of the Union of
Industrial Building Cooperatives (UIBC) and Gennadi T. Baranchikov,
chairman of "Svoy Dom," or, in English, "One's Own
House" - a new joint-stock cooperative formed by UIBC to implement
the Soviet single-family housing system. UIBC is a formal state group of
housing construction authorities responsible for the manufacture of
prefabricated materials used in single-family homes.

In explaining the Svoy Dom initiative to MBA representatives,
Desyatchikov, handling himself as any experienced U.S. businessman
would, was both enthusiastic and cautious in discussing prospects for
the success of the endeavor - likely having seen big ideas fall apart in
the past, and, at the same time, anxious to see that Svoy Dom does not
fail.

"We want to hear all about your housing finance system,"
the Housing Finance Working Group leader said, "right from the
beginning. For example, how do your people buy houses? How do they know
how much to pay for them?" When told, for example, that mortgages
and deeds are recorded at local government offices and that the judicial
system handles disputes when they occur, Desyatchikov at first
understood this to mean that there were strict guidelines covering every
possible problem. The three were then reminded that in the United
States, it is the "judicial system" that resolves disputes,
not strict regulations or edicts.

"We are bringing the end system [, a housing market,] forward
to these people," Russin said. "They are looking at the
specifics of how mortgage lending works on an operational basis."

At Fannie Mae, the Soviet delegation met with Richard K. Eisenberg,
vice president for international finance. Eisenberg and his staff
described the U.S. secondary market from Fannie Mae's point of
view, and noted the Soviets "seemed quite inquisitive and curious
about how Fannie Mae operates."

In the course of their meeting, Eisenberg said, the group touched
on many aspects of U.S. capital markets and finance. In particular,
Eisenberg recalled Desyatchikov's interest in Fannie Mae's
status as a publically-held company. The Soviets had no understanding of
how these instruments work, he recalled. "The concept of a mutual
fund was very interesting to them."

Eisenberg noted the parallel between Fannie Mae's discussion
with the Soviet delegation and those held on a more detailed level in
previous meetings with officials from Poland. Fannie Mae is currently
providing Poland with mortgage training and technical assistance in
accordance with a formal letter of agreement with the Polish ministry of
finance. In October, Fannie Mae held a four-day seminar outside Warsaw,
focusing on three "modules:" the necessary legal and
regulatory framework for U.S.-type mortgage finance, the development of
mortgage products and the development of mortgage instruments. The lack
of such fundamental legal concepts as foreclosure will take considerable
time to overcome for both Poles and Soviets, he explained.

"Right now it's very unclear," Eisenberg said of the
future of the Polish mortgage. "We will do our conference and
afterwards talk about what they should be doing next."

As for the Soviet mortgage specifically, Eisenberg explained that
Fannie Mae is monitoring the Soviets efforts, and will be pleased to
offer assistance wherever an appropriate role is found.

"If there's a role for Fannie Mae [in the Soviet
Union]," he said, "we will be more than happy to consider
it."

Although the Soviets consulted with MBA and Fannie Mae by using an
interpreter, many mortgage finance terms and principles had no direct
counterpart in Russian. Even the Russian word they used for mortgage,
"zakladniye," has archane roots. It stems from the verb
"zakladyvat," which means "to put away." The Soviets
struggled for translations for such terms as "underwriter,"
"household formation," and "credit enhancement," and
literally used the Russian word "obsluzhivat'" - or
"to serve" - to define mortgage servicing.

By the end of the MBA meeting, the Soviets and their interpreter
had adopted many literal Russian equivalents for terms like
"appraisal" and "closing," as well as for concepts
like "mortgage holder" and "employment
verification." They remained most clearly interested in knowing how
the secondary market functions, how loans are packaged and priced, how
the government is involved, and what percentage of loans are FHA versus
conventional. The Soviets insisted that U.S. housing and finance
specialists be patient, but not take them too lightly. After years of
allowing the state to take care of everything, the U.S.S.R.'s
transition to capitalism, particularly in the housing sector, will be
difficult. Desyatchikov in particular conceded that there are powerful
political forces working against economic reform.

Prior battles with these forces have sharpened the focus of Soviet
reformers. While implementing reform may be difficult, the concepts and
principles of the U.S. housing market are not as "difficult"
as they are "complicated," Desyatchikov and Khorov tried to
explain. The fact that they made this precise distinction several times
in their discussion of different issues illustrates their optimism.
Their refreshingly open sense of humor was evident as well. In
describing the extent of the Soviet housing problem, for example,
Desyatchikov told a USA Today reporter during his visit that, "[Our
housing] shortage, you can say, is almost unlimited."

Such optimism seems to border on the heroic when one reviews at the
tortuous history of reform movements in the Soviet Union, and, before
that, in the Russian Empire. The conflict between tradition and reform
has deep roots in the Soviet Union which long predate the Soviet
socialist state. But change, when it comes, has often been radical.

The Soviet Union is by far the largest country in the world -
covering one sixth of the world's land mass and eleven time zones.
Russia and the neighboring republics that make up the Soviet Union are
located in both Europe and Asia and are generally unprotected by natural
barriers (mountains, oceans, lakes and the like). These factors have
left the land open to foreign invasion and influence (from the Romans of
the early Christian era to the Nazi Germans of the 1940s) for centuries.
The repeated invasions have led Russian governments to go into fits of
isolation, followed by desperate efforts to reach out to the outside
world. As a result, Russian society and the country's economy have
continually remained decades behind the West in adapting new ideas and
technologies. Reforms, often on the very verge of success, are rolled
back regularly in fits of paranoia. Perestroika itself is not immune to
such a possibility.

After the Communist revolutions of 1917 and the subsequent civil
war, for example, Lenin in the early 1920s began his own form of
perestroika. This "New Economic Policy," or NEP, opened up
specific consumer markets and allowed some forms of private enterprise
and ownership in order to help rebuild the nation's economy. NEP
was seen by many communists at the time as a major deviation from the
"faith." The reform process was shortlived, however, after
Lenin died in 1924. By 1929, Josef Stalin had reversed Lenin's
perestroika, and launched a massive internal rebuilding program focused
on heavy industry and collectivization of agriculture. The Soviet Union
became increasingly isolated, and internal dissent was dealt with
severely. It is during this period, before and after World War II, that
the main institutions of Soviet economic and political life were
established and nurtured.

To get a full sense of the nature of the challenge that lies before
the Soviets now, it is helpful to review what led to the severe current
housing shortage. Because of long isolation from the world's
economy, the U.S.S.R.'s total capital investment capacity was
severely limited in the 1930s, and housing construction was assigned a
very low priority. Meanwhile, urban housing - which for decades
primarily consisted of simple, wooden, single-story, detached homes -
fell into ruinous neglect. The millions of rural poor forced into the
cities by Stalin's economic policies had to live in makeshift
barracks and shacks. This resulted in severe housing shortages, best
illustrated by the fact that urban living space declined during the
period from 61.3 square feet per person in 1926 to 49 square feet in
1940, and has not yet recovered.

The situation became far worse after World War II. According to Soviet statistics, 1,710 cities, towns and urban settlements, in
addition to thousands of smaller villages, were fully or partially
destroyed. More than 25 million people were left homeless by the war.

After the war, Stalin thought it more important to rebuild heavy
industry than to rebuild the nation's housing. According to his
successor, Nikita Krushchev, "it wasn't until Stalin's
death [in 1953] that the leadership really faced up to the problem of
how serious our housing shortage was." Between 1956 and 1959 annual
state housing production increased from 1.5 to 2.7 million units and
that was a massive undertaking. It came with a price, however, as
Krushchev's government built very inexpensive, multifamily, four-
and five-story, walk-up apartment buildings.

"Do you build a thousand adequate apartments or seven hundred
good ones?" Krushchev asked rhetorically at the time. "The
leadership must proceed from the principle of using available material
resources to satisfy the needs of the people as soon as possible."

The U.S.S.R. has made some improvements in building design and
structure with time, but has essentially followed Khrushchev's
philosophy and kept the annual state housing construction rate at
approximately two million units - as inexpensively as possible. Today,
apartment buildings dot the Soviet suburban landscape, and are known
unaffectionately as "Khrushchev's slums." American
architect Roger Lewis, on a visit to the Soviet Union in late 1989 found
these housing environments to be "at once impressive and
lamentable." He characterized their design, construction and
maintenance quality as "seriously lacking." Also, "there
is a pervasive sameness and sterility in the type and appearance of
Soviet apartment buildings," he explained, "in their crude
detailing, their limited amenities and their vast sites."

Until today, delivering consumer goods, including housing, was not
considered a major priority by Soviet leaders. Such goods were
considered unnecessary and even "anti-socialist." In the
housing sector, this led inevitably to continued shortages and
dissatisfaction. The fact that Soviet housing production has not kept
pace with consumer needs is evident from a 1986 United Nations study
that showed that although the ratio of households-to-dwelling units in
the U.S.S.R. decreased from 1.29 percent in 1960 to 1.05 percent in
1980, it still remained higher than every other nation in Europe with
the exception of Bulgaria and Hungary (1.08 percent), Romania (1.12
percent) and Poland (1.18 percent). The United States' 1980 ratio,
by comparison, was .95 percent.

The combination of the housing shortage and the immense Soviet
bureacracy have produced interesting social responses for subverting the
system. Because there are more households than housing units in the
U.S.S.R., many families live communally. In his best-selling book,
Russia: Broken Idols, Solemn Dreams, David Shipler relays one incident
involving a young Muscovite in his early 30s, married for eight years,
who wanted to move out of the cramped flat that he, his wife and child
were sharing with his mother. They could move in with her mother, but
that would be no better.

In order to qualify for a separate apartment, Shipler explained,
the man "had to produce a signed statement from his mother that she
could not stand his wife, and a signed statement from his mother-in-law
that she could not stand him .... On this fictitious basis ... he got on
a list for a cooperative, waited four years, and finally heard from a
friend about an apartment being vacated. Then he had to pay 2,500 rubles
for each room, the equivalent of eight months' pay."

Gorbachev's leadership has not been unique in Soviet history
in admitting to these inefficiencies and requesting some capitalist
assistance to help cure them. What is unique is the scope of
Gorbachev's efforts and the openness, or "glasnost"
surrounding them. Efforts to secure cooperation from Western economies
are no longer limited to official protocol between governments, but
include the active solicitation and independent involvement of private
firms.

In the mortgage and construction finance areas, joint U.S./U.S.S.R.
projects will continue to bring the expertise of U.S. lenders, builders
and architects to the attention of Soviet bankers and developers. In
September, for example, Citicorp Mortgage completed a three-day Moscow
seminar entitled "Fundamentals of Housing Finance." At the
seminar, more than 240 senior-level Soviet housing construction
officials from 12 of the 14 Soviet republics were given detailed
instruction on ways that housing construction and homeownership are
financed. J.A. Jones Construction, a subsidiary of The Jones Group,
meanwhile held a major working group meeting in October to discuss the
status of several major construction projects.

Soviet laws are evolving and will continue to provide more
guarantees to consumers and private firms. The result will be more joint
ventures, seminars, working group meetings and personnel exchanges that
should present U.S. residential lenders and developers with increasingly
interesting and unique opportunities to help build the Soviet mortgage
and housing system (and improve Soviet living standards) from scratch.

"The Soviets have opened every door for us," CMT's
Koch noted. "Their desire to work with the U.S. is very
strong."

As with all joint U.S./U.S.S.R. initiatives, however, there will be
a need to stay involved for a long time, as Soviet society struggles
with new concerns about market volatility, inflation, competition and
higher housing costs. The political struggles accompanying these
adjustments will be intense, but Soviet reformers remain guardedly
optimistic.

"We will be focusing our educational efforts on our
youth," smiled Desyatchikov wearily after a particularly
complicated discussion with MBA representatives on the financial merits
of originating mortgages servicing-released, rather than
servicing-retained. "Capitalism is for young people with lots of
energy."